In a recent decision of the High Court, Justice Miller
considered the difficult question of when an electricity retailer
will be liable to a domestic consumer for losses caused by power
supply issues such as voltage surges, brownouts or outages. In this
update we briefly review the decision of the Court and consider its
implications.

Background

Most participants in the New Zealand electricity system are
members of the Electricity and Gas Complaints Scheme (the Scheme).
The Scheme provides for an Electricity and Gas Complaints
Commissioner (Commissioner), whose work includes facilitating the
resolution of complaints about services provided to consumers. The
Commissioner, whose decisions are binding on the participant, must
determine complaints (up to a limit of $20,000) by deciding what is
fair and reasonable after observing and applying any applicable
law, including the Consumer Guarantees Act.

Since 2003, the Consumer Guarantees Act (CGA) has applied both
to electricity retailers and electricity lines companies, despite
many lines companies having no contractual relationship with
consumers. Among other things, retailers must ensure that
electricity supplied is of 'acceptable quality' as assessed
by a reasonable consumer having regard to a range of specified
factors. In addition, lines companies are required to use
reasonable care and skill to transport electricity to consumers
(line function services). Failure by retailers and/or lines
companies to comply with these guarantees can give domestic
consumers the right to claim compensation for resulting damage or
loss (including consquential loss).

Until now, it has not been at all clear how the CGA applies in
practice to the sale or delivery of an intangible good like
electricity. Contact Energy & ors v EGCC gives some
guidance.

In this case, all the major retailers (with the Commissioner as
defendant) asked the High Court for a declaration as to how the
Commissioner should deal with complaints against retailers under
the CGA in relation to some specific complaints. The Court was
asked to consider if, and to what extent, retailers should be
liable under the guarantee of acceptable quality for any quality
issues caused as a result of problems in the distribution system in
circumstances where the Commissioner is unable to find the lines
company at fault.

What Did The Commissioner Argue?

The Commissioner accepted that damage might occur to a customer
as a result of an electricity quality problem where the lines
company is not at fault because it has used reasonable care and
skill in the management of its lines. However, in such cases, the
Commissioner argued that the retailer could nevertheless be liable
to the customer under the guarantee of acceptable quality.

All quality problems attributable to faults 'internal'
to the distribution system (ie faulty insulators) would put the
retailer in breach of its guarantee, whether or not any fault could
reasonably have been detected or prevented. Only events
'external' to the system such as force majeure events (ie
environmental hazards), third party damage, limited momentary
voltage fluctuations, notified planned outages and emergency
shutdowns would excuse a retailer from liability.

What Did The Retailers Argue?

The retailers starting position was that retailers should not be
liable at all under the CGA for distribution faults. Distribution
was the responsibility of lines companies and covered by a separate
and less onerous 'reasonable care and skill' guarantee. The
retailers argued that Parliament cannot have intended to impose
fault based liability on lines businesses for distribution faults
while imposing strict liability for the same faults on retailers
(who cannot manage the relevant risk or pass the resulting costs
back to lines companies because of an imbalance of bargaining
power).

In the alternative, the retailers argued that, even if a
distribution fault could give rise to a breach of the
'acceptable quality' guarantee, a reasonable consumer would
be aware of the risks inherent in electricity and expect reasonable
steps to be taken to avoid those risks. A retailer should not be
liable if it could show that these reasonable steps were in fact
taken.

Finally, the retailers made a number of arguments that any
liability should be reduced or not arise because retailers
communicated the risks inherent in electricity supply and the need
for uninterruptible power supplies and/or surge protectors.
Consumers who did not use these protections caused or contributed
to the relevant losses.

What Did The Court Hold?

The Court first looked closely at the history of the 2003
amendments to the CGA and the policy behind those amendments. Based
on this review, the Court concluded that Parliament intended that
retailers could be liable for breach of the acceptable quality
guarantee arising from distribution faults, even where lines
companies themselves were not liable. Among other things, the Court
observed that consumer faults are almost always attributable to
events in the distribution network. It was noted that the
retailers' argument suffered from the disadvantage that, if the
retailers were correct, 'having gone to the trouble of
imposing an implicit guarantee on electricity retailers, the
legislature must be taken to have emptied it of content, leaving
retailers liable only for ancillary services, such as billing and
metering'.

In what is the key finding of the case, the Court then
considered the content of the retailers' guarantee of
acceptable quality. His Honour disagreed with the approach taken by
both the Commissioner and the retailers saying that 'both
parties focus[ed] too much, on responsibility for faults and too
little on the quality of electricity supply actually experienced by
consumers'. The Court went on to disagree with the
Commissioner that a reasonable consumer would expect no faults or
outages in the distribution system other than those considered to
be 'external' in nature, finding that the Commissioner
attached 'insufficient weight to the consumer's
presumed knowledge of the 'internal' characteristics of
supply, and the price that would have to be paid if 'internal
faults' were to be eliminated'.

The Court concluded that breach of the acceptable quality
guarantee will be a question of fact and degree. His Honour listed
the following non-exhaustive factors that the reasonable consumer
must be taken to consider in assessing what is acceptable quality
in the context of electricity supply:

The purposes to which electricity is commonly put; these
include operation of personal computers and other commonplace
electronic equipment.

The nature and extent of any risk posed by a given fault.

The extent, duration and frequency of any departure from
voltage or frequency standards, and the frequency and duration of
outages, both planned and unplanned.

The nature of the distribution system to which the
consumer's premises are connected and the quality standards set
by the Commerce Commission.

The cause of the given fault (which is relevant but not
determinative).

The price of the services and the price the consumer would have
to pay to eliminate faults of the sort that caused the loss.

Anything said by the supplier that would make the quality of
the goods more or less acceptable. His Honour agreed with the
retailers that acceptability could be affected by the
consumer's knowledge that surge protection may protect against
risks that the retailer cannot control.

Having dealt with acceptable quality, the Court proceeded to
deal with the other arguments advanced by the retailers. Arguments
around 'defects' in the supply of electricity being pointed
out to consumers were effectively rejected on the basis that the
warnings in the relevant terms of trade considered by the Court
were too general in nature to excuse the retailer from liability.
The Court left open the question as to whether, in the particular
circumstances, a failure by a consumer to use a surge protector
could reduce the damages payable by a retailer. The onus would be
on the retailer to show that the failure to use a surge protector
was another contributing cause of the relevant loss.

Having rejected the approach taken by both parties, the Court
invited the parties to submit revised draft declarations, if they
wished to do so, for consideration by the Court. In relation to the
specific Commission decisions placed before the Court, these were
referred back to the Commissioner for further consideration in
light of the decision.

Implications Of Decision

We suspect that electricity retailers will have mixed feelings
regarding the decision. On the one-hand, the strict approach to
liability favoured by the Commissioner has been rejected in favour
of a more fact-specific analysis which arguably has greater regard
to the probabilistic nature of failure in the electricity system.
On the other hand, the prospect of liability for defects in the
distribution network beyond the control of the retailer will still
be regarded as unsatisfactory.

Similarly, from the consumer's point of view, the case
leaves open the prospect of a consumer obtaining compensation from
a retailer, even where reasonable steps have been taken to avoid
the quality problem, but to some degree shifts the goal posts in
favour of the retailer.

It will be interesting to see whether the decision results in
retailers reviewing the information they provide consumers
regarding the fragilities of the electricity system and the
benefits of uninterruptible power supplies and surge protectors. In
this regard, it seems to us that retailers tread a fine line
between, on the one hand enhancing their position in any consumer
dispute and, on the other, being seen to undermine confidence in
the electricity system as a whole.

The next step for the parties to this litigation remains to be
seen. As always, we will keep you posted.

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